Posted by: Josh Lehner | September 21, 2017

Oregon Metro GDP, 2016

Hot on the heels of metro level household income data, we now get the annual metro GDP figures as well. In stepping back and looking at the bigger picture, the metro GDP growth looks like one would expect. There is a good reason for that. More in a minute.

Oregon is outperforming the typical state for jobs, wages, and GDP. As such, all of our metros are above average in the most recent data, which makes sense. The specifics can vary a bit, particularly as Albany and Bend register Top 10 in the nation growth. Albany’s growth is led by manufacturing, both durable and nondurable goods. Bend’s by health, professional and business services, and finance. That last one is interesting as Oregon is not a financial hub. Certainly something to look into in the future if it continues.

This second chart compares metro GDP over the entire business cycle. Where are you today relative to before the Great Recession? Here, again the patterns looks like you probably expect. All metros are in the top half or better. Oregon is more volatile. We fall farther in recession so have further to regain in expansion, etc. However one metro sticks out. One is not like the others.

Let’s take a little closer look at the Corvallis MSA (Benton County.) In looking at the industry level GDP, the issue is all about manufacturing value-added. Hmm. This is a really big rise and subsequent fall. The timing is also of interest given the declines didn’t happen until a couple of years after the recession.

What I suspect is going on here is more about how metro GDP is calculated than what is actually happening in Corvallis. What BEA does is calculate state GDP by industry. BEA then shares that down to the metro areas based on earnings by industry. For example, and these are made-up, simplified numbers, if Corvallis has 10% of Oregon’s manufacturing earnings, then basically Corvallis gets 10% of Oregon’s manufacturing value-added. This is fine so far as it goes. However when a particular industry in one region is doing exceptionally well, then this sharing down method yields skewed results. I think walking through a few charts is best to explain this and show the limitations of the data/methodology.

With Oregon GDP there is one, and only one industry that can move the needle like this: computer and electronic products manufacturing. This is also an industry that has a very specific geographic footprint for the most part: Portland, where the vast majority is, and Corvallis. At the state level you can see that the rise and fall of overall manufacturing GDP is all about computer and electronic products. While we don’t have access to the firm level estimates, we know a lot of this growth is due to new semiconductor technology. Each generation of chips, and the fabs that make them are more productive and valuable than the previous generation. It also requires massive investments every handful of years. That research and development occurs in the Portland region. The computer and electronic products in Corvallis are more printer technology related, which has not seen the same growth and investments like semiconductors in recent decades.

Note: Detailed 2016 industry data is not yet available, that is why the total line extends to 2016 and the detail does not.

Now, we know that manufacturing employment in the Corvallis MSA is down and down considerably in the past decade, while Portland’s manufacturing employment has done reasonably well, compared with most regions of the country. However, when you take the state data and share it down to the regions some of that growth is distributed too. In this case, it means Corvallis has received a share of the Portland area investments and expansions because they are classified within the same industry.

And the way you make all of this square, is seeing huge productivity gains (value-added per worker). Are Corvallis manufacturing workers twice as productive as the typical manufacturing worker statewide? Possibly, but unlikely. Some of this, no doubt, is due to the local industrial mix. If a local economy has a mix of higher productivity industries and fewer lower productivity industries then the total will be high. That’s at play here, but so too is the metro GDP methodology.

So, long story short, local level GDP data should be taken with a grain of salt. It is indicative of broad trends and what is happening in the local economy, however imperfect it may be. This is in no way meant to disparange BEA, they are doing the best they can with limited data. They do a great job looking at industry level value-added at the state level. This is fantastic data to have and helpful when looking across a host of economic metrics.

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Posted by: Josh Lehner | September 19, 2017

Oregon Metro Incomes

As our office continues to upack the latest Census data, we will share some of the findings here, and in our quarterly forecast presentations and documents. Today, a quick look at household incomes across Oregon’s metropolitan areas. We will wait for the 5 year ACS, and SAIPE data later this fall before digging into rural trends.

We start first with the state’s largest metro, Portland. Inflation-adjusted incomes now stand nearly 9 percent higher than before the Great Recession. The typical large metro has yet to fully recover its losses. As I dug into the data, I was honestly surprised at how well Portland has done across a host of key economic metrics. I will have more in the next week or so on these findings.

Next we turn to the Willamette Valley. This is an updated chart we discussed a bit more in-depth this summer and it comes from some of the Salem outlook work I did as well. Like Portland, the trends here are about an improving economy beginning to approach full employment.

Third we take a quick look at Bend, the boom-bust phoenix of our time. Out of the 50 worst housing bust metros in the nation, Bend ranks 5th best for median household income, and has clearly outperformed the typical one. The economy is likewise approaching full employment, when the feel-good part of the business cycle comes into view.

Finally we take a look at the Rogue Valley. Here the story is a bit different. Medford is also one of the worst housing bust metros, and against that backdrop, Medford is doing OK. Household incomes in Medford have declined less than in the typical housing bust region, and have regained a bit more than usual. That said, Medford, along with Grants Pass have yet to regain their Great Recession losses and their regional trends differ from the rest of Oregon’s metro areas. Previously our office looked at Grants Pass (Josephine County) and expected the income numbers to turn around. Not so in the 2016 ACS data at least. This warrants a deeper dive once the microdata is available in a couple months and is on the research agenda.

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Posted by: Josh Lehner | September 14, 2017

Poverty and Progress, Oregon Update Edition

This morning the Census Bureau released the 2016 American Community Survey data. There is a ton to unpack here and even more once the microdata is released later this year. In the coming months our office will update and share some of this work.

In order to not bury the lede regarding the 2016 ACS data, Oregon’s household income and poverty numbers look very good. I don’t want to oversell the data, but they are among the best readings in Oregon’s modern history. The underlying, or internal dynamics behind the topline data are even better. This does not mean the economy is perfect, or without issues. We know there remain substantial problems and challenges. It does mean, however, that considerable progress has been made during the current economic expansion following the financial crisis. These gains are not evenly distributed across the state as each regional economy is at a somewhat different point in their local cycle, but taken as a whole, Oregon is finally doing OK again. Oregon is once again close to where it was during the late 1970s, late 1990s, and arguably better than the peak of the housing boom. Importantly, should the expansion last another couple of years, which many economists expect, we are very likely to finally break through many of the stagnant trends of the past 15-20 years. Whether that will be temporary or permanent is not yet known. However the economic trajectory in recent years has been quite good, particularly here in Oregon.

In 2016, Oregon’s median household income, after adjusting for inflation, is at or near the highest it has ever been. I only qualify that due to the margin of error surrounding these estimates and depending upon which inflation measure one uses. Clearly, however, income for the typical Oregon household is back to where it was, if not a little better than at the peak of the dotcom and housing bubbles. Furthermore, the gap between Oregon’s household income and the U.S. is effectively gone. Oregon has typically been 2 or 3 percentage points lower that the U.S. but in 2016 Oregon is just a hair below. And that gap is not statistically significant, for what it’s worth. See here for more on the different measures of income and how Oregon and the U.S. compare.

In looking at the drivers of median household income in Oregon last year, the underlying dynamics look even better. These gains are all about a strong economy approaching full employment. The number of Oregonians with a job is up about 3%. However the number of Oregonians working full-time is up nearly 5%, and for these full-time, year round workers their earnings are up over 6%, nominal. Those are increases in median earnings! Inflation-adjusted that is a 4.8% gain; a tremendous improvement.

Possibly the most encouraging part of these improvements are the gains seen for households in the middle and bottom part of the income distribution. In 2016, incomes for these households are once again above pre-Great Recession levels after adjusting for inflation. Remember, these households are fully reliant upon a strong economy to generate any sort of income gains. High-income households generally have a high-wage job and other sources of income like capital gains, rental income, and the like. Low-income households only have wages, and in some cases the safety net.

Finally, the strong economic improvements that are translating into income growth for all households are now also pulling more Oregonians out of poverty. Oregon’s poverty rate in 2016 stands at 13.3% and below the national average. That said, the poverty rate is still a bit above where it was in 2007, and remains a couple percentage points higher than in 1979 and 1999.

Poverty rates, needs-based caseloads, and demand for other social services are among the last things to turnaround. Oregon is once again squarely in the feel-good part of the business cycle. Further progress remains, however the economy is getting there.

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Posted by: Josh Lehner | September 12, 2017

Poverty and Progress, U.S. Edition

This morning the Census Bureau released new data on U.S. poverty for 2016. Wages are up a little, but considerably more people are working, particularly those working full-time (HT: Jed Kolko). As such progress is being made and poverty continues to decline. As our office has pointed out repeatedly in the past year, the Great Recession did not kill the business cycle. It just felt that way given the severity of the recession. Now that the expansion is reaching all corners of the economy and incomes are rising for those in the middle and bottom part of the income distribution, it is clear the feel-good part of the business cycle is here. Of course there is still much more room for further improvements. Household incomes for most Americans and Oregonians have been flat for 15-20 years at this point, however there are fluctuations around this stagnant trend. To date we’re on the upward trend but incomes are still at or below where they were in the late 1990s. Should the expansion continue for another year or three, household incomes will finally break through this long-run malaise. We are getting there, it’s just been a long and painful road.

Oregon poverty data and for that matter all of the 2016 American Community Survey data will be released on Thursday. Expectations are for another good uptick in household income and decline in the poverty rate. For now here are a couple of high level U.S. charts from the Census report. Note that there is a 2013 methodological break in the Census data. Some historical comparisons are more difficult to make than others, depending upon the exact series you examine. That said, this change does not take away from the fact progress is being made in recent years. Also, data breaks, or series breaks are the worst.

For more on our office’s Poverty and Progress series see our previous work on the business cycle overview, looking at the Portland region, Oregon overall, Josephine County (Grants Pass MSA), historical look at regional poverty in Oregon, and how some needs-based caseloads change over the business cycle. Note that the best local level poverty data comes from the Census’ Small Area Income and Poverty Estimates (SAIPE), which will be released in December.

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Posted by: Josh Lehner | September 8, 2017

In The News: Brewery Closures and Wages

Craft beer sales have slowed. There have been a few high profile brewery closure announcements. Even AB Inbev is downsizing (layoffs) their so-called High End which is made up of all their craft brewery acquisitions in recent years. This combination has some folks once again contemplating a craft beer bubble, or an industry shakeout. All of these big picture trends hit close to home here in Oregon as well. Obviously 10 Barrel and Hop Valley were sold not too long ago. In-state beer sales have slowed or declined for many of the state’s largest breweries. And a number of Oregon breweries announced they were closing, including Southern Oregon Brewing last year and The Commons this year.

One key way to think about this is that the craft beer market is maturing. Making good/craft/independent/local/etc beer is no longer necessary and sufficient to be a successful brewery. In a mature market, good business decisions and strategies matter more. As we wrote in our beer report last year:

To date, Oregon brewery failures have been relatively few although there have been some and more than the conventional wisdom realizes. The failure rate is approximately 2 percent compared with 8 percent for all Oregon industries combined. In any market, there are companies that do better or worse. In a growing market, the winners clearly outnumber the losers. However as craft beer slows overall, the number of firms struggling or losing market share are likely to increase.

And I think this is what we’re seeing play out a little bit more. Now, I haven’t done all the detailed data work for the past year or two, but I don’t think the actual closure rate has increased much, if at all. However, I do think the brewery closure rate will increase in the coming years. It is likely to converge toward the rates seen in other industries. Currently, the growing and largely successful beer industry is enticing even more breweries to enter. Eventually this will lead to (over)saturation and for closures to rise as a result. Given that consumer trends, size of brewery, location of brewery and the like all play huge roles, I don’t know where exactly the industry is in this process, but it is in there somewhere.

Here in Oregon we’re seeing 4 or 5 brewery closures per year at a 2% rate. The overall closure rate for all industries across the U.S. is 7-7.5% with manufacturing more like 6%. In a different data set, Leisure and Hospitality closures are more like 9%. At these rates we’d be talking about 15-20 brewery closures here in Oregon in any given year. Clearly we’re not there yet, and not even that close.

Bottom Line: A maturing craft beer market has many implications, including the importance of sound business practices. However a handful of high profile closure announcements are not likely indicative of big industry problems. The pace of brewery closures remains considerably low and is likely to rise in the coming years even if the industry has no significant problems.

For more on the current state of the beer industry and on closures, see this The Drinking Classes interview with Bart Watson, chief economist for the Brewers Association.

Addendum: While our office talks about the growth in Oregon’s alcohol cluster and compare it with the software industry, one huge difference in these jobs are wages. Software, on average, is around $90,000 per year, whereas the alcohol cluster overall is about 1/3 of that. Jeff Alworth, author of The Beer Bible and the Beervana blog, wrote recently about brewer wages . Jeff cites some third party numbers saying Assistant Brewers make $30-40,000 per year, Head Brewers $35-47,000 and Brewmasters $40-76,000. These are not too far from industry averages seen here in Oregon (breweries, NAICS 31212, $37,100). Brewing is a growth industry, it is value-added manufacturing, it is traded sector and all that stuff, but as Jeff writes, “these are not terrible salaries, but neither are they going to line a person’s garage with Teslas.” These are also salaries that are in-line with manufacturing and production occupations overall.

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Posted by: Josh Lehner | September 6, 2017

Impact of Natural Disasters

Parts of Houston are still flooded. Florida looks to be next. Fires burn across the west. As our lungs here in Oregon fill with smoke, I am finding myself rereading some literature on natural disasters. What follows are a few summary thoughts based on the readings, along with links for those interested in more. It should also be noted there are many more impacts beyond the pure economics and costs of rebuilding, including lost lives, health concerns and broader societal impacts.

First, natural disasters can be economic disasters as well. However, natural disasters tend to impact regional economies but not so much national data. They are usually temporary in nature with the impacted region made economically whole within a year. There are Katrina-sized exceptions and the losses of course are not evenly distributed across the impacted population and business.

The largest damage from natural disasters comes from the destruction of property (buildings, infrastructure, etc) which impacts the productive capacity of a regional economy. This destruction is not accounted for in GDP because GDP measures current production of goods and services. The burned houses, lost cars, and destroyed bridges were all made years ago and counted for GDP growth back then. Perversely the rebuilding phase following a natural disaster does show up in GDP data as roads and homes are rebuilt. Additionally because households, businesses and governments are rebuilding using current products and technologies the capital stock is somewhat enhanced or better off because it is replacing older equipment and buildings. Over the long-run this should support better growth moving forward.

However, a region does need to recover in the first place before we can even begin to talk about the future and not just a lost cause. Moody’s Analytics (no link) provides a good summary of the steps needed to achieve this. They also stress the importance of timeliness in the policy response for recovery. Specifically they write:

The roadmap for restarting a regional economy after a natural or man-made disaster has six stops: providing short-term income and other financial assistance to distressed households; reviving the regional economy’s disrupted export-oriented businesses; providing financial, legal and regulatory forbearance; reconstructing public infrastructure and institutions; providing tax incentives for housing and business development; and facilitating a well-functioning insurance market.

Furthermore there are some very likely long-run impacts to things like tourism when scenic areas are destroyed and potential economic growth is lower given one cannot log a forest and make wood products if the forest is gone. How do you value these changes? For wood products it is more a function of lost potential activity, which can be measured in standard economic models. However for environment goods there are a number of ways, including things like existence value or contingent valuation methods. These estimate people’s willingness to pay to preserve and maintain something like a natural forest, or people’s willingness to accept its loss. While WTP and WTA are similar in concept, they differ considerably in real life due to things like loss aversion, or how humans treat gains and losses differently.

Natural disasters not only scar the land but they also leave lasting impressions in our brain. I’m from the Great Plains and I remember as a kid seeing the aftermath of the Yellowstone fires of 1988 and the Great Flood of 1993 along the Mississippi River even years after the fact. The apocalyptic pictures we are seeing now of the Gorge, and outside of Los Angeles will leave a lasting psychological mark. Our hope is they do not leave a huge lasting societal and economic mark as well.

Oregon Wildfires and Data

OPB’s Chris Lehman reports that more than 500,000 acres have burned in Oregon this year at a cost of over $200 million. Almost all of that is on private and federal lands (the Gorge is mostly USFS land). Wildfires and state lands have actually been low the past couple of years, following huge burns prior to that. From a societal and economic perspective it doesn’t matter where the fires are. However from a budget perspective it clearly does. A few years ago I know the E-Board had to authorize additional money for fighting wildfires.

At extreme times the increase in seasonal fire fighters even shows up in the employment data. In conversation years ago with our friend at Employment, they looked into this odd spike in state employment back in 2002. It likely wasn’t regular state workers given we were in the middle of the disastrous 2001-03 biennium. They think it was likely people fighting the massive Biscuit Fire, but aren’t 100% sure of it.

Links, a minimal list

Headwaters Economics has lots of really good work and interactive maps on wildfires in the west, including looking at land developed in the wildland-urban interface. Headwaters also did an Oregon-specific report a few years ago as well. I found their summary slides here to be really useful.

The St. Louis Fed looked at natural disasters back in the mid-1990s following the Great Flood of 1993.

The World Economic Forum also has a summary article on natural disasters and firm behavior.

Outlook Risk

Finally, the following risk is included in our quarterly forecast document. In an oversight it leaves out fire, however this is something our office and our advisors have been thinking about more in recent years.

  • Climate. Weather forecasting is even more difficult than economic forecasting a year or two into the future. While the severity, duration and timing of catastrophic events like earthquakes and droughts are difficult to predict, we do know they impact regional economies. Droughts in particular impact our agricultural sector and rural economies to a larger degree. Longer-term issues like the potential impact of climate change on domestic migration patterns are likewise hard to predict and outside our office’s forecast horizon. There is a reasonable expectation that migration flows will continue to be strong as the rest of the country becomes less habitable over time.

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Posted by: Josh Lehner | August 29, 2017

Oregon’s Regional Recovery Gathers Steam

Just as Oregon’s economic expansion continues, so too does regional growth across the state. While half of the Oregon’s individual counties are currently at all-time highs for employment, nearly all have added jobs in the past year. Given regional variations, industrial mix, and noisy data, not once in the past 20+ years have each of Oregon’s 36 counties added jobs at the same time. In the second quarter 33 did add jobs over the past year, keeping with the typical pattern seen during expansions. Only Curry (barely), Morrow and Sherman counties lost jobs in the past 12 months.

Even as growth continues, it has slowed across most regions like it has statewide. This is particularly the case in the Portland region. Jobs are now being added at approximately a 2 percent pace throughout much of the metro area. This is the slowest growth the region has seen during an expansion in quite some time. Typically the Portland region sees 2% job growth when it is entering or exiting a recession. Job growth in recent months has picked up some in unrevised data, which is encouraging, if true.

Even as the state overall and the large urban areas have slowed, not every county has. Encouragingly a few of the hardest hit areas of the state are actually, finally seeing a pick-up in growth. These include some coastal, eastern, and southern communities. In particular Coos, Crook, Grant, Josephine, Klamath, Lake, Lincoln, and Wheeler counties are now adding jobs at a faster rate than in either 2015 or 2016. Except for Josephine (Grants Pass MSA), these regions of the state are not back to employment levels seen prior to the Great Recession, and some remain below late 1990s employment levels. However the trajectory of growth has improved considerably. The Southwestern, and Southeastern Oregon regional economies are now more than halfway back to where they were prior to the recession. All other regional economies within Oregon are back.

Of course looking just at the total number of jobs is an incomplete way to assess the economy. This was a point brought up during our most recent forecast release to the legislature. What really matters is whether there are enough jobs for everyone who wants one. And also whether there are enough willing workers for growing businesses. Our office uses a metric where we compare the actual job growth in a region of the state with what we estimate to be the growth in the potential labor force. This looks at population growth (or decline) and changes among demographic groups. For Southeast and Southwestern Oregon in particular their potential labor forces are smaller today than a decade ago. They have not seen much population growth, and a larger segment of their population has aged into their retirement years. As such, while their total employment remains 4-5% below pre-Great Recession levels, their employment gaps are smaller at 1 or 2%. Similarly, while Central Oregon’s employment is nearly 11% above pre-Great Recession levels, the region has just now caught up with population growth and effectively eliminated its jobs gap.

It is important to note that while many rural counties and regions do face demographic challenges and a shrinking working-age population, these demographic headwinds have pretty much played out. The demographic drag is done. Moving forward the vast majority of rural Oregon counties are expected to have increasing potential labor forces.

Finally, some of these job gains in rural Oregon are driven in part due to the local industrial structure and nature of the Great Recession. Many rural economies are more reliant upon housing and government than the larger, more diverse urban economies. It is not so much that rural areas love housing and government. Rather it is the rest of the private sector is smaller, thus making the public sector in particular a larger share. As the economy has continued to improve, migration flows have returned and public sector budgets are growing again, rural economies across Oregon have seen better growth. Even as the public sector remains a steady share over time in Oregon, that steady share varies in magnitude depending which part of the state we are looking at.

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Posted by: Josh Lehner | August 23, 2017

Oregon Economic and Revenue Forecast, September 2017

This morning the Oregon Office of Economic Analysis released the latest quarterly economic and revenue forecast. For the full document, slides and forecast data please see our main website. Below is the forecast’s Executive Summary.

The economic expansion continues and the outlook remains bright. For the first time since the financial crisis, the U.S. economy lacks a major headwind. Expectations are not for a substantial pick-up in growth rates themselves, but for the expansion to endure, possibly becoming the nation’s longest on record. If anything, the current macroeconomy is a conundrum for the Federal Reserve given low unemployment and low inflation. Even so, there do remain significant risks to the outlook, particularly the uncertainty of federal policy.

Oregon’s economy is largely tracking expectations of slower growth in a mature expansion. The state continues to see healthy job gains that are enough to keep pace with a growing population and hold down the unemployment rate. However recent, preliminary employment reports, and stabilizing growth in withholdings out of Oregonian paychecks indicate that risks may be tilted toward the upside over the next year.

To maintain stronger labor market gains Oregon will need to see either stronger population growth overall or higher labor force participation rates among current residents. To date Oregon has experienced a very strong, and needed labor force response. Participation rates have increased considerably in recent years as more Oregonians have come back to the workforce in search of the more-plentiful and better-paying jobs. Further participation gains, particularly among the prime-age population is not unreasonable to expect in a strong economy. Oregon continues to hit the sweet spot as the economy approaches full employment.

Oregon’s General Fund revenues surged at the end of the 2015-17 biennium, putting Oregon’s unique kicker law into play. Both personal and corporate tax collections grew at double-digit rates during the fourth quarter of the fiscal year. As such, the personal and corporate tax kicker payments that were assumed in the May forecast have become a reality, and have grown in size.

Personal income taxes ended the biennium 2.3% above the Close of Session forecast, triggering a $464 million kicker for tax year 2017 to largely be paid out during income tax filing season in April 2018. Corporate excise taxes ended 2015-17 $111 million above their Close of Session forecast, and above 2% kicker threshold. However, instead of returning unanticipated corporate collections to taxpayers, statute directs that the corporate income tax kicker be dedicated to education spending.

Heading into the 2017-19 biennium, a larger kicker payment reduces expected revenue growth. Combined with weaker outlooks for corporate profits and inflation, the larger kicker has resulted in a $60 million reduction in the outlook for General Fund tax collections. However, this reduction is more than offset by a stronger lottery sales forecast, higher ending balances in BI2017-19, and $227 million in legislative changes made during the 2017 session.

Although revenue growth is still healthy compared to other states, the slowing pace of Oregon’s expansion has become evident in tax return data just as it is has in the economic data.  Income growth has been cut in half over the past two years, with slowing across a wide range of income types. While still growing for now, business, retirement, investment and labor income have all decelerated rapidly. Looking ahead, General Fund revenue growth in the current biennium is expected to be only one-third of what was seen during BI2015-17.

Revenue growth in Oregon and other states will face considerable downward pressure over the 10-year extended forecast horizon.  As the baby boom population cohort works less and spends less, traditional state tax instruments such as personal income taxes and general sales taxes will become less effective, and revenue growth will fail to match the pace seen in the past.

See our full website for all the forecast details. Our presentation slides for the forecast release to the Legislature are below.

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Posted by: Josh Lehner | August 17, 2017

Oregon Government Size, An Update

Yes, the public sector here in Oregon continues to grow. We have never had more public employees or more tax revenue than we do today. However the regional economy and the number of total Oregonians has never been larger either. Once you make the adjustment of comparing the public sector to the size of the population, or tax revenues as a share of personal income, Oregon’s public sector hasn’t increased in size for decades. And make no mistake, adjustments like these are the correct way to examine the size of government over time. Reasonable people, and unreasonable ones too I suppose, can debate the proper role and scope of the public sector. However a larger population means there are more residents in need of services, from schools to roads to law enforcement and so forth. And a stronger economy generating jobs and income does translate into more tax dollars for the public sector.

The first chart shows public employment relative to the state’s population over time. There was a sizable increase in the 1960s and 1970s as safety net programs were expanded and the Baby Boomers aged through the education system. However since 1980 or so, public employment has been growing in-line with the overall Oregon population. And if we’re really trying to keep score, the relative size of the public workforce today is the smallest it has been since the early 1980s. Public education employment hasn’t been this low, relative to the population, since the 1960s, at least in part because the school-age population is a shrinking share of the state population.

Tax revenues are no different. They grow and decline along with the business cycle, but have remained a steady share of personal income for decades.

Such findings are seen in many other research reports as well. For example, here is what ECONorthwest President John Tapogna showed as part of the Oregon Business Plan [pg 31] at their early 2017 annual meeting. These figures include a broader set of public revenues than what is included above, but the big picture takeaway is the same.

Now, some of you may be asking why we have budget issues when public employment and revenues have been a stable share of the economy. There’s a short answer and a long answer. The short answer is costs are increasing faster than revenues, and forecasted to continue to do so. The long answer is more complicated and the spending, or expenditure, side of the discussion is outside our office’s duties and expertise. That said there are numerous complicating economic and demographic factors influencing these budget issues as well. I gave a presentation on some of these issues earlier this year and will write a summary in the coming weeks. Stay tuned.

Finally, for those interested in more, during the legislative session our office gave a brief presentation to the House Committee on Economic Development and Trade on the impact of public employment in rural Oregon. Those slides are below:

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Posted by: Josh Lehner | August 9, 2017

Labor Supply, How Much More?

Right now we know the labor market is tight. Help Wanted signs and media reports of businesses saying they can’t find enough workers are a daily occurrence. Standard economic measures like the unemployment rate agree. If Oregon is to see stronger labor force growth, or labor supply, it will have to come from some combination of faster population growth and/or higher labor force participation rates among Oregonians. The question is: will we get it?

Our office recently asked our advisors about this. Our baseline outlook says the slower job growth we’ve seen in the past year is here to stay and much of the participation gains have played out. We feel strongly that this is the most likely outcome, however there is upside risk here too. Job growth, labor force participation, and population growth can all come in better than we expect. Even in a world with a kicker law, better economic growth is a good thing.

First, however, it must be highlighted that Oregon already has a good labor force response. A lot of Oregonians are back in the workforce in search of the more-plentiful and better-paying jobs in recent years. While it is true the labor force participation rate remains lower today than a decade or two ago, much of the decline is due to the aging population. The participation gap — the difference between the actual LFPR and an estimate of what it s/would be at full employment — is essentially as small today as at any point since the dotcom bust. Can we do better?

Changes over the past 20 years vary considerably by age group. However economists tend to focus on the so-called prime working-age population, 25 to 54 years old. This group is less prone to changes in higher education enrollments (unlike 18-24 year olds), or retirement decisions (unlike 55+ year olds). However, participation rates even among these prime-age Oregonians have fallen. See our previous reports on prime-age men and prime-age women for more on educational attainment and middle-wage jobs.

Everything else equal, fewer available workers does represent lower potential economic growth moving forward. So a key question is why are participation rates down? What are these prime-age Oregonians doing instead of looking for work? The chart below shows the relative shift (increase) for each reason folks are not in the labor force since 2000, the last time the economy as at, or beyond, full employment.

Keep in mind that while labor force participation is a yes or no question on paper and in the data, it really operates on a continuum. There are a lot of factors that go into the decision. It is not truly black and white. What if a job offer came it at $2/hr more? $5/hr more? What if a slot opened up at the neighborhood childcare center making it easier to drop off and pick up your kid(s)? What if the company on the bus line had an opening? And so forth.

Similarly, the reasons why people say they are not looking for work imply different outlooks for future growth too. More-plentiful job opportunities are likely to pull discouraged workers back in who previously gave up looking. Those enrolled in school will return when they graduate. However those in bad health may be unable to return to the workforce even if they want to. Those saying they are retired may be less likely to rejoin as well.

Nonparticipation rates are up across the board, in all age groups (except 65+), for both sexes, and for all types of reasons. That said there is important variation. Higher ed enrollment is more pronounced among the 25-34 year olds (and 18-24). The increase in stay-at-home moms is also among the younger group. While the increase in the ill or disabled are most pronounced among the older prime-age group (45-54).

In looking at the chart, going from more likely to return to the labor force to less likely, it’s easy to see another percentage point or two increase as reasonable. More is possible, but then you get further into the gray areas. Now, the data above is lagged and uses a multi-year average to help with sample size concerns. Real time participation data indicates Oregon has already seen some additional gains. Employment and participation is now close to where it was a decade ago, however further gains are needed to return to late 1990s rates.

Finally, the big increase in those saying they are too ill or disabled to work is a big concern. Does it represent a major public health issue, possibly even linked to the opioid crisis? Does it simply reflect larger societal acceptance/acknowledgement of chronic pain? Does it represent individuals trying to save face when asked why they aren’t working? Or does it represent an increase in those claiming disability for financial reasons and benefits?

It is hard to pin down the exact reasons. However we can largely rule out disability benefits as the driver. As an economist, it’s clear that incentives matter. By paying some people to not work (because they are unable to do so), there is an incentive to apply for and receive disability benefits. However, when digging into the data, it is clear that the increase in those actually receiving disability income and those actually part of the Social Security Disability Insurance Program is considerably smaller than the overall increase in people citing ill health or disability as the reason they are unable to work. Now, it is one factor, one component of these trends, however it is clearly not the major driver.

Note: Our office is working on some opioid-related work. Hopefully it will be ready in the not-too-distant future to discuss.

Summary: While our office expects the slower job growth to continue, it does not mean the numbers cannot come in better than we expect. Some slack remains. Should a stronger economy pull more workers back into the labor force it would be great news.

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